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"2013 was a very good year for Hiscox. Our long term strategy of building local retail businesses in Europe, the UK, Guernsey and the US to balance internationally traded business in London and Bermuda continues to deliver. We are excited about the opportunities we see in many retail markets where we have room to grow profitably. In our big ticket areas, discipline and opportunism will guide us."

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details

For further information

Hiscox Ltd

Jeremy Pinchin, Group Company Secretary

+1 441 278 8300

Kylie O'Connor, Head of Group Communications, London

+44 (0)20 7448 6656

Brunswick

Tom Burns, Fiona Micallef-Eynaud

+44 (0)20 7404 5959

Notes to editors

About Hiscox

Hiscox, the international specialist insurer, is headquartered in Bermuda and listed on the London Stock Exchange (LSE:HSX). There are three main underwriting parts of the Group - Hiscox London Market, Hiscox UK and Europe and Hiscox International. Hiscox London Market underwrites internationally traded business in the London Market - generally large or complex business which needs to be shared with other insurers or needs the international licences of Lloyd's. Hiscox UK and Hiscox Europe offer a range of specialist insurance for professionals and business customers, as well as high net worth individuals. Hiscox International includes operations in Bermuda, Guernsey and USA.

For further information, visit www.hiscoxgroup.com.

Chairman's statement

In my first full-year statement as Chairman, it is pleasing to report an excellent underwriting result and the second highest profit for the Group. A benign hurricane season and sound underwriting contributed to the very good results, with every area performing well. Our reinsurance and London market insurance benefited from the lack of US hurricanes, and also underwrote well to minimise losses from the European and Calgary storms. Our regional businesses in the UK, Europe, Guernsey and USA have also reaped the rewards of sustained investments in both infrastructure and marketing.

The plan has not changed with the passing of the baton from the previous Chairman to me. We aim to expand our regional businesses continuously, whilst growing the bigger ticket businesses when margins are high, or contracting when those margins reduce. We will maintain the same strategy of balance that has served us so well over time.

Results

The results for the year ending 31 December 2013 were a profit before tax of £244.5 million (2012: £217.5 million). Gross written premium increased by 8.5 per cent to £1,699.5 million (2012: £1,565.8 million) and net earned premium increased 7.1 per cent to £1,283.3 million (2012: £1,198.6 million). The combined ratio was 83.0 per cent (2012: 85.5 per cent). Earnings per share increased by 24.9 per cent to 66.3 pence (2012: 53.1 pence) and the tangible net asset value per share increased by 16.0 per cent to 381.4 pence (2012: 328.7 pence). Return on equity increased to 19.3 per cent (2012: 17.1 per cent).

Dividend, balance sheet and capital management

The Board has reviewed the capital requirements of the Group for the coming year and has proposed that a special distribution of 36.0p per share (amounting to approximately £128 million), should be made. This represents two successive years where we have been able to share our success with shareholders with an additional capital return. We do not promise a third.

Following the distribution, the Group's capital levels will be similar to those of the opening balance sheet, post the 2013 capital return, which will have a favourable impact on both the Group premium to capital gearing ratio and return on capital, whilst still providing sufficient headroom above existing internal and external capital needs. This proposed return of capital will be made by way of a C/D share scheme, which is a variation of the B share scheme used in 2013, and as in the previous year, will be combined with a share consolidation.

In addition, a sum of 14.0p per share will be paid instead of a final dividend for the year ended 31 December 2013 as part of the C/D share scheme. This amount, together with the interim dividend of 7.0p per share, represents a total dividend for 2013 equal to 21.0p per share (2012: 18.0p), an increase of 16.7%, in line with our policy of progressive dividend growth. As a result of this amount being paid as part of the C/D Share Scheme, a scrip dividend alternative will not be offered to shareholders.

Full details of the proposed return of capital and final dividend equivalent will be set out in a circular expected to be despatched to Hiscox shareholders on or around 25 February 2014.

Investments

Traditionally many in our industry have relied on investment income for more than half their overall profits. However, the persistence of low interest rates has shifted the balance between underwriting and investment income. Our investment strategy remains cautious: we will not take undue risk, preferring modest investment returns alongside better underwriting results to fuel profits. Our investments delivered a return of 1.9% (2012: 3.1%) which is good, given the challenging year in bond markets, and was driven by our allocation to risk assets, principally equities. A return to higher interest rates will be welcome, but given the more likely long road to normality, it seems that bond investors will have the wind in their faces for another year, and we will remain patient.

The market and our opportunities

So much of the punditry this year has been about the growth of the ILS (Insurance Linked Securities) market and its effect on reinsurers and pricing. Competition has increased but as a respected leader in reinsurance we have been able to maintain our share of well-rated business. Reducing margins are a big issue for businesses that have no alternative to reinsurance. Although we are not immune, we are in the fortunate position of being able to reduce lines of business where this competition impinges and grow in areas where it does not.

We have organised the two reinsurance teams under a single leader to face the new challenges of today and we have also formed our own ILS fund to deploy both our own and others' capital.

Our success in Reinsurance has rather overshadowed the London Market Insurance business which has quietly been doing very well. With its new leadership we feel it is well placed to continue to grow in 2014.

In Hiscox UK, Hiscox Europe and Hiscox USA, our market share in our chosen specialist lines is still small and we see many opportunities for growth. We are investing heavily in our direct-to-consumer businesses in the UK, Europe and USA as we aim to take advantage of the growing trend to purchase insurance direct, online and over the phone. In 2013, 50% of our customers in the UK and USA (160,000 householders and businesses) chose to buy cover directly from us. In 2013, the Group spent £30 million on marketing, and plan for the same this year. Under the leadership of Steve Langan our investment in marketing has built a recognised and respected consumer brand in the UK and we are making good headway in other markets.

People and future

As I write this, the windows of my office are rattling in the wind, rivers are rising and the media is reporting the polar vortex freeze in the USA. Events such as these remind us of the importance of insurance and delivering on our promise to our customers. We issue a promise to pay, and it is only when a claim is made that we truly prove our worth.

When we surveyed our employees this year about life at Hiscox, 95% said they believed in our values and 92% were proud to work here. When I first started at Hiscox in 1986 we employed 18 people in the London Market only. Today we employ over 1,600 skilled and determined people around the world and they are the future of this business. We have been setting our ambitions for the next ten years and believe it is essential that our employees continue to keep the Hiscox values at our core. To reach our ambitious targets, we are asking more of our employees; more courage and great entrepreneurship delivered with Hiscox's characteristic spirit. I am very proud to work with such talented people and thank them for their sterling efforts this year.

Finally

We have underwritten and sold well. We continue to strive for world class service and to delight our customers when they make a claim. We have also had good luck but we have taken our chances when they were presented. However we cannot presume that the elements in 2014 will be as kind to us as they were in 2013, already we have seen extreme weather events, freezes in the US and floods in the UK. We can rely on core skills to drive profitability. Opportunities abound across our retail businesses in UK, Europe and USA and we have great people taking advantage of them. We are not complacent and will continue to invest for the future, both in markets and in infrastructure, and we relish the challenges ahead.

Robert Childs

24 February 2013

2014 Chief Executive's report

I am pleased to report a profit before tax of £244.5 million (2012: £217.5 million) and a return on equity of 19.3% (2012: 17.1%). The improved profit was the result of better performance within our European and US businesses, coupled with continued good performances from our UK, Guernsey, London Market and Bermuda businesses. Our long-term strategy of building locally traded specialist retail business to balance our internationally traded business continues to deliver.

With these results, we have announced a capital return of 50p per share, equal to approximately £178 million in total. We are fortunate that our business is strong enough both to allow this return of capital whilst simultaneously investing in new opportunities.

The insurance market is currently facing many challenges. Alternative sources of capital have entered the reinsurance market putting pressure on pricing, while central banks' policies of financial repression are keeping investment returns low. Thanks to our long-term strategy we have choices - in product, distribution and geography - which should allow us to continue to deliver good results in a changing world.

Hiscox London Market

Our London Market businesses delivered another excellent profit of £116.0 million (2012: £121.9 million), and increased gross written premiums by 4.4% to £668.2 million (2012: £640.0 million). It achieved a combined ratio of 75.4% (2012: 75.5%), driven by a relative lack of natural catastrophes and good underwriting.

During the year we separated our London Market business into insurance and reinsurance lines. Our aim has been to give these different product areas more dedicated leadership, providing greater focus on the changing market conditions and the opportunities they produce.

London Market Insurance

The London Market Insurance lines of property, marine and energy, casualty, aerospace and specialty have consistently delivered excellent profits over the last ten years and in 2013 they delivered another good result.

In April, Paul Lawrence was promoted to Chief Underwriting Officer of Hiscox London Market and, together with his more focused leadership team, he has brought new energy and a business development mindset which is already bearing fruit.

Business in the London Market has always been placed either on a stand-alone, risk-by-risk basis, or grouped together to facilitate placement. There has been a lot of controversy surrounding facilities in the London Market this year as the market has seen an increase in their number and size. We have a lot of experience writing them in the US where business has been routinely placed in this way. We believe that facilities can be underwritten profitably provided we have underwriting control, a right to say no and realistic commissions. If these conditions are satisfied, then we expect facilities to play a role in 2014's business expansion plans.

Looking at each division in turn:

Property

Our property division includes US and international commercial property, power and mining risks, US catastrophe exposed personal lines as well as terrorism traded in the London Market.

A lack of natural catastrophes and a refocus of the business have delivered an excellent result for our big-ticket commercial and household property lines. We have grown our small binding authority business, which is still carrying rate increases, whilst maintaining our larger big-ticket business at reasonable rates.

Our terrorism business had a strong year, as a young energetic team took the reins. It was recognised by its peers with the accolade of 'Underwriting Team of the Year' at the Insurance Day London Market Awards. Drawing on new hires with global security and front-line counter terrorism experience, we created a Counter Terrorism Advisory team which assists clients with risk management and prevention. This supplements our relationship with Control Risks and consolidates our market leading position.

Marine and energy

The marine and energy team delivered another good profit. The marine hull team have worked hard to improve profitability in a lack lustre market and delivered an exceptional result. Pressure was felt in energy lines as fewer construction projects and more oil companies looking to self insure, led to reduced demand. In 2014, we are focused on building opportunities in emerging markets such as Brazil.

The Costa Concordia market loss continues to deteriorate as leading edge salvage operations go on at insurer's expense. Thanks to astute reinsurance purchasing, our results were not affected by the continually increasing market loss. We have seen an improvement in terms and prices at the renewal of the International Group of P&I Clubs in February, as the market adjusts as a result of ever growing salvage costs.

We launched an online product for marine employers' liability, accessible to retail brokers in the US. It has already generated £1 million in premium, a good start, and developed technology which we expect to put to use in other London Market lines.

Casualty

In casualty we have seen some firming of rates, but it is by no means a hard market. We continue to pick our way through, marrying good underwriting with our core appetite to deliver a strong result. We have ambitions to play a significant part in the London Market directors and officers' (D&O) arena, writing US and some international business. We have bolstered our team with some senior hires during the year. We now have the ability to offer a full suite of products across a broad range of markets, professions and risks including lawyers, architects and engineers, healthcare, technology risks, miscellaneous errors and omissions (E&O), management liability, and privacy. We have also created a consortium with another Lloyd's insurer, creating significant D&O capacity, and increasing the attractiveness of Lloyd's to the US market.

Aerospace and specialty

This division includes our aviation, space, contingency, kidnap and ransom, political risks and personal accident business.

The aviation market has seen significant downward pressure on major airline accounts. Our underwriters remain disciplined, walking away from poorly rated business, seeking growth by developing products which combine aviation with our terrorism capabilities. The space market has suffered around $700 million of satellite losses during the year, which we largely avoided. We expect this will have a positive impact on rates.

Our political risks team have had a good year despite the challenging times. The team is looking at ways to leverage their expertise and underwrite outside the Lloyd's market, potentially using licences available to our insurance companies.

Contingency continues to be a small jewel in our crown, delivering another good result. The personal accident team developed a new product which will cover top European football clubs for financial loss when star players suffer long-term injury or illness. This has already generated headlines and we hope will generate good incremental revenues.

Alternative distribution

It is a perception, though a slightly unfair one, that Lloyd's underwriters sit at Lloyd's waiting for business. Our underwriters are frequent travellers visiting existing brokers and seeking new agents who will send business to London. We have created a new division that combines technology with this desire to travel to bring new opportunities to London. The marine employers' liability product referred to earlier is a case in point.

Through our relationship with White Oak, a specialist automotive and equipment underwriting agency, we provide extended warranty cover against sudden and unforeseen mechanical breakdown for cars, trucks and other heavy machinery. Our business with White Oak has grown rapidly over recent years and now represents 24% of our London Market Insurance gross written premium. This type of indemnity does not include endemic failure or product recall. During the year White Oak launched a scheme in China (in conjunction with local Chinese carrier Ping-An) which will become one of the largest Chinese deals in the London Market. We also cover fire, theft and collision (FTC) for heavy machinery used within agriculture, construction and forestry businesses globally, providing first party coverage to the client's vehicle only.

We expect that the importance of this division will grow, bringing new opportunities to the other parts of the London Market team.

London Market Reinsurance

The reinsurance team trading in London has performed well. Premiums reduced slightly as the team exercised discipline in the face of price declines at the June and July renewals. Our marine, catastrophe, pro-rata and retro books performed well. Our risk excess book suffered from the Rio Tinto, YPF/La Plata, Dietz and Watson events. Aggregate profits remained strong. During the year we brought together the leadership of the London and Paris reinsurance teams which comprise the London Market Reinsurance business with the teams in Bermuda, to underwrite as Hiscox Re from January 2014, giving us greater presence in an evolving market. This consolidates our expertise, capacity and market profile under the leadership of Jeremy Pinchin. The teams underwrote a combined £411.5 million of reinsurance premium during 2013, making Hiscox a top tier player.

Hiscox International

Hiscox International comprises our activities in Bermuda, Guernsey and the United States. Gross written premiums grew by 12.9% to £472.1 million (2012: £418.3 million) driven by good growth in Hiscox USA. Profit before tax increased to £80.9 million (2012: £62.7 million) and the combined ratio improved to 81.0% from (2012: 89.2%).

Hiscox Bermuda

Hiscox Bermuda had another good year, with premiums growing by 5.6% to £211.9 million (2012: £200.7 million), with good growth in our healthcare business. Profits remained strong.

As expected, reinsurance rates at the important 1 January renewals were down by approximately 16%. Given the aggressive nature of competition from both traditional and new sources of capital, our reinsurance business will shrink in 2014 as we continue to prioritise quality clients who value our underwriting, brand and balance sheet.

Third party capital partners are very important to the Group and we have good support from quota share partners and Syndicate Names. In 2014 they are backing Hiscox Re at a record level. We continue to explore new opportunities in the Insurance Linked Securities (ILS) space, and through Kiskadee we launched a number of collateralised reinsurance funds during the year. We have deployed $110 million of capital - less than we had expected as we are seeing signs that capital markets investors are being more disciplined than some traditional reinsurers. We believe that over time, our record of prioritising profit over volume will win a following in this new investor base, and our support from them will grow.

Hiscox Guernsey

In Guernsey we underwrite fine art, kidnap and ransom (including piracy) and terrorism, supported by broking teams in London and Miami. Premium income reduced slightly to £70.8 million (2012: £73.0 million). Profits have grown strongly through a combination of disciplined underwriting and fewer claims. We have benefitted from subrogation recoveries from other insurers on prior-year claims and the absence of large fine art losses. The team is not resting on its laurels and is investing in more talent in Miami and London to expand distribution on a stand-alone basis and in partnership with local insurers and brokers.

Hiscox USA

Our US business had another year of strong growth. Gross written premiums grew by 31.1% to £189.5 million (2012: £144.5 million) with progress across all major areas. Losses reduced materially as we grew towards scale and benefited from a positive development of reserves.

Our wholesale business which includes property and professional liability lines grew by 20% and made a good profit. Our specialty business grew by 22% but profitability was mixed. Strong performance in kidnap and ransom, media, technology and terrorism was offset by more challenging performance in construction, and the still nascent D&O and entertainment businesses. We refocused our underwriting appetite in construction and adjusted our pricing in D&O, we expect this to drive better performance in 2014.

Our small business proposition, which we sell direct and through partnerships, grew by 140%; we now have over 50,000 small business customers, and are selling over 1,000 policies a week. We continue to explore new distribution opportunities and launched a portal to wholesale brokers during the year. Brand building continues, with campaigns in San Diego, Austin and Boston. In time these efforts will benefit the entire US business.

The rating environment in the US is mixed. Overall rates remain healthy, with slight upward pressure in some casualty lines, and downward pressure in property. We are very pleased with our fast growing US business and expect that, absent significant catastrophe losses, it will make a small profit in 2014.

Hiscox UK and Hiscox Europe

Our retail businesses in the UK and Europe delivered a record profit of £56.4 million (2012: £49.1 million). Gross written premiums grew by 10.2% to £559.1 million (2012: £507.5 million). The combined ratio improved to 92.6% (2012: 94.4%).

We have built our retail businesses by understanding local markets and bringing Lloyd's style flexible underwriting and thinking to local brokers. As part of the evolution of Hiscox, Steve Langan, previously Managing Director of Hiscox UK, became Managing Director of Hiscox UK and Europe. Pierre Olivier-Desaulle remains Managing Director of Hiscox Europe, reporting to Steve, and we created two new divisions in the UK, one for the broker channel and one for direct. The Managing Directors of these two divisions report to Steve. The restructure will allow customer insight, alternative distribution approaches, new products and good marketing practices to be shared more easily - all part of the ongoing 'retailisation' of our business.

Hiscox UK

Hiscox UK had another excellent year and grew gross written premiums by 9.9% to £412.4 million (2012: £375.2 million). The business had profits of £45.4 million (2012: £45.2 million) with a combined ratio of 90.7% (2012: 92.1%).

The business benefitted from our continued investment in marketing and a focus on solid underwriting. It had a charmed first 11 months, as the weather had been benign until mid-December while the few major weather events, such as the St Jude's day storm in October had little impact. The heavy rain and consequent flooding in December changed this. Our clients suffered extensive damage to their homes both from driving rain and flooding and we responded quickly. A post bag of thank-you letters in January is testament to the fact that dealing with the Hiscox claims team is succour in troubled times.

Our high net worth household business was tested by the floods and has performed well. Its market reputation meant that client retention remained strong and it had its best new business premium for ten years. Our professions and specialty commercial book also made good progress and a new technology insurance portfolio offering that responds to the growing prevalence of breach of contract claims was launched. Our underwriting relationship with Dual, an independent managing general agent, had a testing year and we have agreed changes to underwriting appetite which should see better performance in the future. Our partnerships business had a good year, retaining all of its existing partnerships as well as securing five new ones including the Royal Institute of British Architects and the Royal College of General Practitioners. Our new tied agency Hiscox Private Client is doing well.

We are also establishing a strong presence in York, where we are creating a purpose built multi-function office. We now have 70 people based in our temporary office, working within our Customer Experience Centre, Hiscox Underwriting Centre and IT. In December we received planning consent for the permanent building, and construction will commence in the first half of 2014.

Hiscox Europe

Our European business had an outstanding year, generating a record profit of £10.9 million (2012: £3.9 million), despite £3m investment in marketing to support our fledging direct businesses in France and Germany. It had solid growth of 10.9% to £146.7 million (2012: £132.3 million), with new business up by 14%driven by commercial lines in Germany and France. After shrinking for several years, our high net worth business in Europe also returned to growth.

Hiscox Europe continues to lead the way in devising alternative distribution deals, in which we sell our specialist products through larger financial institutions. This year we added France's Crédit Agricole to our list of partners. Work continues to reduce expenses across Europe, with a simplified referral process, greater use of pre-priced proposal forms and an operating model which ensures that underwriters are able to focus on business development and underwriting larger risks, with smaller risks and renewals handled by office-based teams. We expect a continued steady improvement in expenses, maintaining our profit performance.

In Germany we launched direct-to-consumer small business insurance. Aimed at businesses in knowledge-based professions including IT, management and business consulting, it matches our existing offering in France and complements the German broker channel. As in the US and UK, we expect that in time the marketing expenditure required to build our French and German brands will benefit all distribution channels.

Our market positions in mainland Europe are small compared with our UK position and the quality of our offering is reflected by strong growth despite tough economic conditions, so we expect continued profitable growth and development in mainland Europe.

Claims

2013 was a relatively benign year for large scale catastrophe losses. Despite the market increasing reserves for the Costa Concordia our net loss has reduced slightly to US$19 million. For the first 11 months we did not experience material losses as a result of extreme weather events, such as the Central European floods, the Calgary storm in Canada, the St Jude's day storm which hit the UK and Europe, and typhoon Haiyan which battered the Philippines. This clearly changed in the UK with the period of sustained rain and flooding which began in mid-December. We reserved £11 million for UK flood claims in December. UK flood and storm losses have continued into January and February. We expect to reserve a further £5 million to cover these losses.

Our commitment to pay claims fairly, fast and with a smile remains at the heart of our business. We have built claims teams that lead the market and it is gratifying to receive external recognition of this. Our London Market business was ranked in the top three for claims in a recent Gracechurch survey and our UK team was recognised with a number of industry awards; 'UK Claims Excellence Awards' at the Insurance Times Claims Excellence Awards and 'Personal Lines Claims Team of the Year' at Post Magazine's Claims Awards.

Whilst reserve releases of £140 million were down from £152 million last year, they continue to reflect Hiscox's cautious reserving approach.

The UK Government and the insurance industry are currently working on the creation of Flood Re to provide mutualised insurance cover. Hiscox supports the overall initiative but feel that current plans are unfair and unworkable. At the moment rented properties, leasehold properties, homes built after 2009 and H/I band council tax homes are being excluded from the mutual. The excluded will also have to pay a levy to fund Flood Re, but would be unable to purchase subsidised insurance from Flood Re, even though their neighbours and other bands would be able to. It has been widely reported that the levy would be £10.50 per residential property. This is highly misleading; it will actually be 2.2% of premium paid and we estimate that Band H homes will pay 20 times more than the average home in Britain. We are calling on the Government to work with us to find a solution to ensure that either these groups are included in Flood Re, or that they are excluded fully - both in payment and benefit. Floods are one of the most traumatic claims we see, a flood doesn't discriminate and neither should the Government.

Marketing

During 2013 we spent £30.6 million on marketing across the Group, an increase from £26.3 million in 2012. Most of this was spent promoting our direct-to-customer operations in the UK, the US, France and Germany. The balance was spent on broker channel marketing; either marketing to brokers, or helping them market to their customers. A small amount was also spent on corporate sponsorships, mainly supporting art related activities.

Our marketing activity has been instrumental in building the Hiscox brand, communicating what we do to an ever broader audience, building awareness of Hiscox and ultimately driving sales. Its benefits have been most felt in the UK where it has had a positive impact not only on the direct channel, but also in the retail broker channel, and even in our Lloyd's activities. As we spend more in other geographies I believe we will see similar broad business benefits.

Operations and IT

Efficient operations and sound IT is the backbone which supports the day-to-day activities of every part of our Group. During 2013 we made progress on a number of inter-related projects which will benefit different divisions within the Group.

During the year we successfully insourced the service centre dealing with our UK direct home insurance clients. This involved hiring 35 people to staff a newly formed Customer Experience Centre in York. This process went very smoothly and we are now considering its extension to other lines of business.

We also began a project to replace the core underwriting, policy administration and claims systems supporting our retail businesses. The current core system is over 20 years old, so it has performed well, but its time is now up. We are working under the slogan 'simplicity is the ultimate sophistication' and we expect to complete the first phase of implementation, for our UK direct home system, this year. In time we expect to replace the entire UK retail infrastructure, and then that of our European businesses. The total cost of the project in the UK is expected to be £45 million spent over a period of 4 to 5 years.

In Europe our 'Get Fit' programme is gaining traction. This is based on a foundation of lean manufacturing principles and we are slowly seeing our European expense ratio reducing. This programme is continuing in 2014 and should help underpin growing profitability of our European broker channel business.

In the US our operations team have been working hard to support the 30% growth. This has seen further investment in our Atlanta and Virginia Beach service centres.

In our London Market activities we are very dependent on shared services which support Lloyd's, the company market and the brokers. At the beginning of 2013 we took the decision to become more engaged in driving improvement across the market, and we now have representatives on several key committees. Involvement in market reform can at times be a frustrating process, but we feel that we can play a role in leading the market for the benefit of all.

Investments

Hiscox's investment income has historically accounted for about half of the Group's profits, but this was never going to be the case in 2013 given the harsh investment climate and our excellent underwriting result. Our investments, before derivatives, made £58.9 million (2012: £92.7 million) equating to a return of 1.9% (2012: 3.1%). We had expected our return to be lower than in 2012, but 1.9% can qualify as better than expected in the world of financial recession in which we are investing. The return from our bond portfolios was much lower than in 2012, but this was as forecast. It has been a challenging time for most fixed income investors, and indeed 2013 turned out to be one of the more volatile years in these markets. It was a good year to be short duration, and our caution has resulted in a low, but positive contribution.

Our exposure to risk assets made a significant contribution to the investment performance this year, and a number of our UK-focused funds produced particularly strong returns. We started 2013 with a weighting to risk assets of 6.2% and trimmed this slightly after the strong run in May, but this has now moved up to 7.1%.

Our overall asset allocation did not change very much during the year. We built up our cash levels towards the end of 2013 and we are happy to have money in the bank ahead of a year where bonds markets face headwinds and equities are unlikely to maintain their recent performance. Central bankers' reaffirmation that short-term interest rates were set to stay low for some time has meant our return expectations from our bond portfolios remain modest. Our overall investment income in 2014 is expected to be dependent on the performance of our risk asset portfolio. Although short dated bonds may be similarly valued to a year ago, the same cannot be said of equities. Current valuations and an uncertain outlook for corporate earnings means we will continue to closely monitor our exposure. Patience and prudence still lie at the heart of our investment strategy but with some appetite for risk in asset classes where valuation seems more reasonable.

Capital management

We have announced today a capital return of 50p per share, equal to approximately £178 million. This is composed of a 36p per share capital return and a further amount of 14p in place of a final dividend. This will take total capital back to £1,231 million, slightly more than our level at the start of 2013, post the capital return in March of last year.

This is the second year in a row of such a capital return, but we do not believe that this is a pattern. We are working hard to deploy as much capital as possible in sectors where we can earn returns in excess of our cost of capital, but we think the right decision is to return capital not properly deployed, after retaining a prudent buffer, to shareholders. The Board will continue to keep this balance under review.

Our people

2013 was a year that saw substantial changes in Hiscox's leadership and structure. Robert Hiscox retired as Chairman in February 2013 and was succeeded by Robert Childs, who was previously our Chief Underwriter. Richard Watson, Rob's successor as Chief Underwriter was appointed to the Board in May.

We have also made progress in areas less visible to shareholders. We are steadily appointing a second tier of management who will in the future be candidates to assume the most senior leadership roles within Hiscox. In the broader organisation 39% of promotions were filled by internal candidates. We want Hiscox to be a great place to work and grow for the ambitious and talented - so I am delighted that we have filled so many roles from within.

Structural and role changes always have the potential to upset a business, so it is a testament to the robustness of Hiscox and the drive to succeed amongst all our staff that we flourished this year. I would like to thank all staff for the role they played in achieving this - but know that they remain hungry for further progress and success.

Outlook

During 2013 we used the change of Chairman to initiate a process to define our ambitions for the years ahead. This process considered the more conventional strategic questions of products, markets and customers, as well as the type of firm we aspire to be in the future.

The good news from a shareholder perspective is that the strategic work suggests that the insurance markets and customer segments we already serve are sufficiently large enough, and our current market shares small enough, to allow us to double the size of business we have today through organic growth. We also believe that we can create further growth opportunities through judicious hiring of talented people or teams, or through small acquisitions which serve as a base for further development.

The conversation with our staff showed them to have the ambition to capture this strategic opportunity whilst wanting to retain the values that have guided Hiscox to date. However, we realise that we all need to grow personally if we are to develop Hiscox in this way. We have therefore committed Hiscox to living our values of courage, quality, integrity, excellence in execution and humanity. We have also challenged each member of staff to acknowledge that "what got us here, won't get us there" and to accept that delivering on each of our personal growth agenda's is the key to unlocking the business growth opportunities.

For me personally, after 20 years at Hiscox, this process has been hugely energising. My colleagues and I remain restlessly ambitious to grow and develop Hiscox.

Bronek Masojada

24 February 2014

Consolidated income statement

For the year ended 31 December 2013

2013
Total

2012

Total

restated*

Note

£000

£000

Income

Gross premiums written

4

1,699,478

1,565,819

Outward reinsurance premiums

(328,364)

(297,679)

Net premiums written

4

1,371,114

1,268,140

Gross premiums earned

1,598,879

1,487,859

Premiums ceded to reinsurers

(315,568)

(289,238)

Net premiums earned

4

1,283,311

1,198,621

Investment result

7

59,809

92,424

Other revenues

9

20,905

13,930

Revenue

1,364,025

1,304,975

Expenses

Claims and claim adjustment expenses

(572,440)

(719,792)

Reinsurance recoveries

53,161

180,966

Claims and claim adjustment expenses, net of reinsurance

17

(519,279)

(538,826)

Expenses for the acquisition of insurance contracts

(305,777)

(283,615)

Operational expenses

9

(276,965)

(235,872)

Foreign exchange losses

(9,890)

(20,173)

Total expenses

(1,111,911)

(1,078,486)

Results of operating activities

252,114

226,489

Finance costs

(7,176)

(8,605)

Share of loss from associates after tax

(400)

(430)

Profit before tax

244,538

217,454

Tax expense

19

(6,780)

(9,428)

Profit for the year (all attributable to owners of the Company)

237,758

208,026

Earnings per share on profit attributable to owners of the Company

Basic

20

66.3p

53.1p

Diluted

20

63.5p

51.0p

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details

The related notes 1 to 22 are an integral part of this document.

Consolidated statement of comprehensive income

For the year ended 31 December 2013, after tax

2013

Total

2012

Total

restated*

£000

£000

Profit for the year

237,758

208,026

Other comprehensive income

Items never reclassified to profit and loss

Remeasurements of the employee retirement benefit obligation

9,775

(2,069)

Income tax relating to components of other comprehensive income

(2,865)

173

6,910

(1,896)

Items that may be reclassified to profit and loss:

Exchange differences on translating foreign operations

(2,030)

(35,806)

Income tax relating to components of other comprehensive income

-

-

(2,030)

(35,806)

Other comprehensive income/(loss) net of tax

4,880

(37,702)

Total comprehensive income for the year (all attributable to owners of the Company)

242,638

170,324

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

The related notes 1 to 22 are an integral part of this document.

Consolidated balance sheet

At 31 December 2013

2013

2012

restated*

Note

£000

£000

Assets

Intangible assets

72,720

69,617

Property, plant and equipment

20,219

18,055

Investment in associates

7,754

9,054

Deferred tax

32,123

25,608

Deferred acquisition costs

197,628

166,041

Financial assets carried at fair value

12

2,585,054

2,406,269

Reinsurance assets

11

458,822

540,389

Loans and receivables including insurance receivables

13

493,419

492,064

Current tax asset

3,530

1,513

Cash and cash equivalents

16

564,375

657,662

Total assets

4,435,644

4,386,272

Equity and liabilities

Shareholders' equity

Share capital

20,854

20,703

Share premium

4,953

41,313

Contributed surplus

89,864

245,005

Currency translation reserve

22,681

24,711

Retained earnings

1,271,109

1,033,634

Total equity (all attributable to owners of the Company)

1,409,461

1,365,366

Employee retirement benefit obligation

4,366

16,907

Deferred tax

75,946

134,473

Insurance liabilities

17

2,609,121

2,596,612

Financial liabilities

12

229

301

Current tax

32,383

6,998

Trade and other payables

18

304,138

265,615

Total liabilities

3,026,183

3,020,906

Total equity and liabilities

4,435,644

4,386,272

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

The related notes 1 to 22 are an integral part of this document.

Consolidated statement of changes in equity

For the year ended 31 December 2013

Share capital

Share premium

Contributed surplus

Currency translation reserve

Retained earnings

Total

Note

£000

£000

£000

£000

£000

£000

Balance at 1
January 2012, as previously reported

20,563

32,086

245,005

60,517

897,728

1,255,899

Impact of change in accounting policy

-

-

-

-

(11,376)

(11,376)

Restated balance at 1 January 2012*

20,563

32,086

245,005

60,517

886,352

1,244,523

Total recognised comprehensive income for the year (all attributable to owners of the company)

-

-

-

(35,806)

206,130

170,324

Employee share options:

Equity settled share based payments

-

-

-

-

6,135

6,135

Proceeds from shares issued

52

1,649

-

-

-

1,701

Deferred and current tax on employee share options

-

-

-

-

5,190

5,190

Scrip dividends

21

88

7,578

-

-

-

7,666

Dividends paid to owners of the Company

21

-

-

-

-

(70,173)

(70,173)

Restated balance at 31 December 2012*

20,703

41,313

245,005

24,711

1,033,634

1,365,366

Total recognised comprehensive income for the year (all attributable to owners of the Company)

-

-

-

(2,030)

244,668

242,638

Employee share options:

Equity settled share based payments

-

-

-

-

12,523

12,523

Proceeds from shares issued

133

3,990

-

-

-

4,123

Deferred and current tax on employee share options

-

-

-

-

5,030

5,030

B Share Scheme:

Return of capital, special distribution

21

-

(42,453)

(107,718)

-

-

(150,171)

Final dividend equivalent

21

-

-

(47,423)

-

-

(47,423)

Scrip dividends

21

18

2,103

-

-

-

2,121

Dividends paid to owners of the Company

21

-

-

-

-

(24,746)

(24,746)

Balance at 31 December 2013

20,854

4,953

89,864

22,681

1,271,109

1,409,461

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

The related notes 1 to 22 are an integral part of this document.

Consolidated statement of cash flows

For the year ended 31 December 2013

2013

2012

restated*

Note

£000

£000

Profit before tax

244,538

217,454

Adjustments for:

Interest and equity dividend income

(42,571)

(45,699)

Interest expense

7,176

8,605

Net fair value gains on financial assets

(14,847)

(37,654)

Depreciation and amortisation

9,650

7,833

Charges in respect of share based payments

12,523

6,135

Profit from sale of subsidiaries

(1,536)

-

Other non-cash movements

925

1,963

Effect of exchange rate fluctuations on cash presented separately

491

9,481

Changes in operational assets and liabilities:

Insurance and reinsurance contracts

70,576

(8,245)

Financial assets carried at fair value

(170,817)

(49,377)

Financial liabilities carried at fair value

(72)

301

Other assets and liabilities

4,321

13,596

Cash flows from operations

120,357

124,393

Interest received

41,494

51,743

Equity dividends received

789

1,631

Interest paid

(5,229)

(7,256)

Cash paid to the pension fund

(1,800)

(1,800)

Current tax (paid)/received

(39,712)

56,403

Net cash flows from operating activities

115,899

225,114

Cash flows from the sale and purchase of subsidiaries

20,940

-

Cash flows from the sale and purchase of associates

600

(3,104)

Cash flows from the purchase of property, plant and equipment

(4,545)

(3,103)

Cash flows from the purchase of intangible assets

(9,594)

(7,505)

Net cash flows from investing activities

7,401

(13,712)

Proceeds from the issue of ordinary shares

4,123

1,701

Distributions paid to owners of the Company

21

(220,219)

(62,507)

Net cash flows from financing activities

(216,096)

(60,806)

Net (decrease)/increase in cash and cash equivalents

(92,796)

150,596

Cash and cash equivalents at 1 January

657,662

516,547

Net (decrease)/increase in cash and cash equivalents

(92,796)

150,596

Effect of exchange rate fluctuations on cash and cash equivalents

(491)

(9,481)

Cash and cash equivalents at 31 December

564,375

657,662

The purchase, maturity and disposal of financial assets is part of the Group's insurance activities and is therefore classified as an operating cash flow. The purchase, maturity and disposal of derivative contracts is also classified as an operating cash flow. Included within cash and cash equivalents held by the Group are balances totaling £113,312,000 (2012: £86,168,000) not available for immediate use by the Group outside of the Lloyd's Syndicate within which they are held.

The related notes 1 to 22 are an integral part of this document.

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

Notes to the financial statements

1. General information

The financial information set out in this statement is extracted from the Group's consolidated financial statements for the year ended 31 December 2013. The auditors have reported on those 2013 financial statements which include comparative amounts for 2012. Their report was unqualified.

The Hiscox Group, which is headquartered in Hamilton, Bermuda, comprises Hiscox Ltd (the parent Company, referred to herein as the 'Company') and its subsidiaries (collectively, the 'Hiscox Group' or the 'Group'). For the period under review the Group provided insurance and reinsurance services to its clients worldwide. It has operations in Bermuda, the UK, Europe, and USA and employs over 1,600 people.

The Company is registered and domiciled in Bermuda and on 12 December 2006 its ordinary shares were listed on the London Stock Exchange. As such it is required to prepare its annual audited financial information in accordance with Section 4.1 of the Disclosure and Transparency Rules and the Listing Rules, both issued by the Financial Conduct Authority (FCA), in addition to the Bermuda Companies Act 1981. The first two pronouncements issued by the FCA require the Group to prepare financial statements which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated statement of cash flows and the related notes 1 to 22 in accordance with International Financial Reporting Standards ('IFRS') adopted by the European Union.

The consolidated financial statements for the year ended 31 December 2013 include all of the Group's subsidiary companies and the Group's interest in associates. All amounts relate to continuing operations. The financial statements were approved for issue by the Board of Directors on 24 February 2014.

2. Significant accounting policies

Except as described below, the accounting policies applied in these consolidated financial statements are consistent with the prior year. The consolidated financial statements as at, and for the year ended 31 December 2013 were compliant with International Financial Reporting Standards as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981.

Changes in accounting policies

(a) Defined benefit plans

As a result of the adoption of IAS 19 (2011), the Group has changed its accounting policy with respect to the recognition of defined benefit obligations on the balance sheet and the basis for determining the income or expense relating to it.

Under IAS 19 (2011), the option to apply the corridor method has been removed and the Group must recognise the full unfunded obligation/(surplus scheme assets) on the balance sheet. In addition, the Group is now required to calculate the net interest expense/(income) for the period on the net defined benefit liability/(asset) by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period. Previously the Group determined interest income on plan assets based on their long-term rate of expected return.

The impact of the change is as follows:

Impact to the financial statements of the adoption of IAS19 (2011)

31 December 2011

31 December 2012

31 December 2013

Previously reported

£000

Adjustment

£000

Restated

£000

Previously reported

£000

Adjustment

£000

Restated

£000

Pre accounting policy change

£000

Adjustment

£000

Reported

£000

Total assets

4,222,741

-

4,222,741

4,386,272

-

4,386,272

4,435,644

-

4,435,644

Total liabilities

(2,966,842)

(11,376)

(2,978,218)

(3,007,888)

(13,018)

(3,020,906)

(3,022,877)

(3,306)

(3,026,183)

Total equity

1,255,899

(11,376)

1,244,523

1,378,384

(13,018)

1,365,366

1,412,767

(3,306)

1,409,461

Total comprehensive income

Year to 31 December 2012

Year to 31 December 2013

Previously reported

£000

Adjustment

£000

Restated

£000

Pre accounting policy change

£000

Adjustment

£000

Reported

£000

Profit before tax

217,124

330

217,454

241,772

2,766

244,538

Tax (expense)/credit

(9,352)

(76)

(9,428)

(6,816)

36

(6,780)

Profit for the period

207,772

254

208,026

234,956

2,802

237,758

Other comprehensive income

(35,806)

(1,896)

(37,702)

(2,030)

6,910

4,880

Total comprehensive income

171,966

(1,642)

170,324

232,926

9,712

242,638

b) Fair value measurements

IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other IFRSs. In particular, it unifies the definition of fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date.

In accordance with the transitional provisions of IFRS 13, the Group has applied the new fair value measurement guidance prospectively. The change had no significant impact on the measurement of the Group's assets and liabilities

(c) Presentation of items of other comprehensive income

As a result of the amendments to IAS 1, the Group has modified the presentation of items of other comprehensive income in its consolidated statement of comprehensive income, to present separately items that would be reclassified to profit or loss in the future from those that would never be. Exchange differences on translating foreign operations have been classified as an item that may be subsequently reclassified on the basis that this reclassification would arise if the operation was sold, although it does not necessarily reflect managements' intention. Comparative information has also been re-presented accordingly.

The adoption of the amendment to IAS 1 has no impact on the recognised assets, liabilities and comprehensive income of the Group.

(d) Subsidiaries

As a result of IFRS 10, the Group has changed its accounting policy for determining whether it has control over and consequently whether it consolidates its investees. IFRS 10 introduces a new control model that focuses on whether the Group has power over an investee, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns.

The Group reassessed the control conclusion for its investees at 1 January 2013 and no changes in control conclusions were made.

(e) Joint arrangements

As a result of IFRS 11, the Group has changed its accounting policy for its interests in joint arrangements. Under IFRS 11, the Group classifies its interests in joint arrangements as either joint operating or joint ventures depending on the Group's rights to the assets and obligations for the liabilities of the arrangements. When making this assessment the Group considers the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangement and other facts and circumstances. Previously the structure of the arrangement was the sole focus of classification.

The Group has re-evaluated its involvement in the only arrangement which could be considered joint, the participation in Syndicate 33 and concluded that it is outside the scope of both IFRS 10 and IFRS 11. The Group will therefore continue to only consolidate its 72.5% share of Syndicate 33.

2.1. Statement of compliance

The consolidated financial statements have been prepared in accordance with IFRS as adopted by the European Union and in accordance with the provisions of the Bermuda Companies Act 1981.

Since 2002, the standards adopted by the International Accounting Standards Board have been referred to as IFRS. The standards from prior years continue to bear the title 'International Accounting Standards' (IAS). Insofar as a particular standard is not explicitly referred to, the two terms are used in these financial statements synonymously. Compliance with IFRS includes the adoption of interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC).

The Group currently applies IFRS 4 Insurance Contracts which specifies the financial reporting for insurance contracts by an insurer. The standard was issued by the IASB as the first phase in their project to develop a comprehensive standard for insurance contracts. Accordingly, to the extent that IFRS 4 does not specify the recognition or measurement of insurance contracts, transactions reported in these consolidated financial statements have been prepared in accordance with another comprehensive body of accounting principles for insurance contracts, namely accounting principles generally accepted in the UK.

In July 2013, the IASB issued their second exposure draft for Phase II of the insurance contracts project. The exposure draft in its current form will require a number of significant changes to the measurement of insurance contracts and as such adoption of a final standard in a form similar to the exposure draft will likely have a significant impact on the results of the Group. In addition, the IASB has stated they will allow approximately three full years from the date of any final standard to actual implementation, therefore 2018 is likely to be the earliest date for the adoption. We continue to monitor the progress of the project.

2.2. Basis of preparation

The financial statements are presented in Pounds Sterling and are rounded to the nearest thousand unless otherwise stated.

They are compiled on a going concern basis and prepared on the historical cost basis except that pension scheme assets included in the measurement of the employee retirement benefit obligation, and financial instruments including derivative instruments, are measured at fair value. Employee retirement benefit obligations are determined using actuarial analysis.

The balance sheet of the Group is presented in order of increasing liquidity. The accounting policies have been applied consistently by all Group entities and to all periods presented, solely for the purpose of producing the consolidated Group financial statements.

The Group has financial assets and cash of over £3.1 billion. The portfolio is predominantly invested in liquid short dated bonds and cash to ensure significant liquidity to the Group and to reduce risk from the financial markets. In addition the Group has significant borrowing facilities in place.

The Group writes a balanced book of insurance and reinsurance business spread by product and geography. As such, the Directors believe that the Group is well placed to manage its business risk and continue to trade successfully.

The Directors therefore have an expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

2.3. Reporting of additional performance measures

The Directors consider that the claims ratio, expense ratio and combined ratio measures reported in respect of operating segments and the Group overall at note 4 provide useful information regarding the underlying performance of the Group's businesses. These measures are widely recognised by the insurance industry and are consistent with internal performance measures reviewed by senior management including the chief operating decision maker. However, these three measures are not defined within the IFRS framework and body of standards and interpretations and therefore may not be directly comparable with similarly titled additional performance measures reported by other companies. Net asset value per share and return on equity measures, disclosed at notes 5 and 6, are likewise considered to be additional performance measures.

3. Financial risk

Credit risk

The Group mitigates counterparty credit risk by concentrating debt and fixed income investments in high quality instruments, including a particular emphasis on government gilts issued mainly by North American countries and the European Union, excluding those from Portugal, Ireland and Greece.

An analysis of the Group's major exposures to counterparty credit risk excluding loans and receivables, based on Standard & Poor's or equivalent rating, is presented below:

As at 31 December 2013

AAA

AA

A

Other / non-rated

Total

£000

£000

£000

£000

£000

Debt and fixed income securities

654,602

1,143,308

310,642

227,277

2,335,829

Deposits with credit institutions

-

4,292

1,802

146

6,240

Reinsurance assets

12,020

149,759

269,353

27,690

458,822

Cash and cash equivalents

132,415

86,436

344,868

656

564,375

Total

799,037

1,383,795

926,665

255,769

3,365,266

Amounts attributable to largest single counterparty

115,430

517,997

110,198

7,050

As at 31 December 2012

AAA

AA

A

Other / non-rated

Total

£000

£000

£000

£000

£000

Debt and fixed income securities

816,153

834,671

369,528

174,514

2,194,866

Deposits with credit institutions

900

-

12,303

-

13,203

Reinsurance assets

16,714

153,440

340,711

29,524

540,389

Cash and cash equivalents

149,291

77,090

429,949

1,332

657,662

Total

983,058

1,065,201

1,152,491

205,370

3,406,120

Amounts attributable to largest single counterparty

209,847

489,070

106,502

5,398

The largest counterparty exposure within AAA rating at 31 December 2013 is the German Government and at 31 December 2012 it was with the UK Treasury. For the AA rating it is with the US Treasury at both 31 December 2013 and 2012. A significant proportion of 'other/non-rated' assets are rated BBB and BB at 31 December 2013 and 2012. The Group's AAA rated reinsurance assets include fully collateralized positions at 31 December 2013 and 2012. At 31 December 2013 and 2012, the Group held no material debt and fixed income securities that were past due or impaired beyond their reported fair values, either for the current period under review or on a cumulative basis. For the current period and prior period, the Group did not experience any material defaults on debt securities.

An analysis of the Group's debt and fixed income securities at 31 December by class is detailed below:

2013

2012

%

%

Government issued bonds and instruments

41

34

Agency and government supported debt

9

12

Asset backed securities

10

10

Mortgage backed instruments - agency

5

7

Mortgage backed instruments - non-agency

3

3

Mortgage backed instruments - commercial

3

3

Corporate bonds

26

27

Lloyd's deposits and bond funds

3

4

Within the fixed income portfolios, which include debt securities, deposits with credit institutions and cash equivalent assets, there are exposures to a range of government borrowers, on either a direct or guaranteed basis, and banking institutions. The Group, together with its investment managers, closely manages its geographical exposures across government issued and supported debt.

The positions at 31 December 2013 and 2012 in respect of government issued and supported debt are shown in the table below. The Group has no direct government exposure to Portugal, Ireland or Greece.

Year to 31 December 2013

Year to 31 December 2012

Government issued

Government supported

Total

Government issued

Government supported

Total

£000

£000

£000

£000

£000

£000

United States of America

499,409

97,797

597,206

489,070

120,991

610,061

United Kingdom

290,332

5,911

296,243

209,847

23,083

232,930

Australia

-

1,976

1,976

-

8,921

8,921

Austria

1,420

-

1,420

-

-

-

Belgium

2,333

-

2,333

-

-

-

Canada

1,236

41,473

42,709

17,297

31,373

48,670

Denmark

-

265

265

-

4,384

4,384

Finland

10,170

-

10,170

7,003

2,197

9,200

France

941

2,232

3,173

6,551

1,531

8,082

Germany

84,905

29,441

114,346

109,871

51,806

161,677

Italy

3,818

-

3,818

-

-

-

Netherlands

60,962

3,690

64,652

-

12,329

12,329

Norway

-

462

462

3,118

-

3,118

Supranationals

-

33,453

33,453

-

25,645

25,645

South Korea

-

-

-

2,614

209

2,823

Spain

2,499

1,271

3,770

-

-

-

Sweden

1,691

421

2,112

2,191

1,133

3,324

Other

2,500

1,161

3,661

1,474

-

1,474

Total

962,216

219,553

1,181,769

849,036

283,602

1,132,638

Included above are £1,180 million (2012: £1,012 million) in relation to holdings in debt securities, none (2012: £10 million) are held as deposits with credit institutions and £2 million (2012: £111 million) held as cash equivalents, having a maturity of less than three months at the time of purchase. Of the amount held as cash equivalents, £1 million (2012: £75 million) is held with the US Treasury, £1 million (2012 : £nil ) is held with the French Government and there is no holding (2012: £35 million) with the UK Government.

Additionally, the geographical location and credit quality of individual bank borrowers are closely monitored. An analysis of the Group's exposure to bank counterparties by country and credit rating held at 31 December 2013 and 2012 is detailed below.Bank debt held by the Group is mostly senior unsecured and covered bonds. The subordinated bonds are all classed as lower tier 2 capital.

Bank debt

31 December 2013

Senior

Sub-ordinated

AAA

AA

A

BBB

Sub-total

A

BBB

B

Sub-total

Total

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

United States of America

-

1,942

70,392

3,451

75,785

314

2,506

-

2,820

78,605

United Kingdom

6,605

3,654

12,473

2,367

25,099

-

1,312

-

1,312

26,411

Australia

2,373

12,395

1,720

-

16,488

-

-

-

-

16,488

Canada

9,022

8,085

11,933

146

29,186

208

-

-

208

29,394

Denmark

720

-

-

-

720

-

-

-

-

720

France

634

-

18,788

-

19,422

-

-

-

-

19,422

Germany

732

-

1,025

-

1,757

-

-

-

-

1,757

Italy

-

-

-

1,925

1,925

-

-

-

-

1,925

Japan

-

-

2,071

-

2,071

-

-

-

-

2,071

Netherlands

2,938

11,026

3,299

-

17,263

-

803

-

803

18,066

New Zealand

662

1,660

-

-

2,322

-

-

-

-

2,322

Norway

1,695

-

-

-

1,695

-

-

-

-

1,695

Sweden

1,860

5,958

5,699

-

13,517

-

-

-

-

13,517

Switzerland

1,203

1,200

3,400

-

5,803

-

-

-

-

5,803

Other

-

186

-

340

526

-

-

-

-

526

Total

28,444

46,106

130,800

8,229

213,579

522

4,621

-

5,143

218,722

Included in the bank debt table above are £213 million in relation to holdings in debt securities and £6 million held as deposits with credit institutions.

Bank debt

31 December 2012

Senior

Sub-ordinated

AAA

AA

A

BBB

Sub-total

A

BBB

B

Sub-total

Total

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

United States of America

-

-

65,651

1,311

66,962

603

-

-

603

67,565

United Kingdom

10,632

4,375

12,948

-

27,955

303

894

1,394

2,591

30,546

Australia

1,102

7,829

-

-

8,931

-

-

-

-

8,931

Canada

12,066

4,973

15,090

-

32,129

1,828

823

-

2,651

34,780

Denmark

349

-

537

-

886

-

-

-

-

886

France

1,364

292

8,373

-

10,029

-

-

-

-

10,029

Germany

-

-

1,712

-

1,712

-

-

-

-

1,712

Netherlands

1,893

3,516

4,751

-

10,160

-

765

-

765

10,925

New Zealand

662

637

-

-

1,299

-

-

-

-

1,299

Norway

1,704

-

1,059

-

2,763

-

-

-

-

2,763

Spain

-

-

-

614

614

-

-

-

-

614

Sweden

1,853

6,723

6,432

-

15,008

-

-

-

-

15,008

Switzerland

-

-

8,833

-

8,833

-

-

-

-

8,833

Other

-

190

304

495

989

-

-

-

-

989

Total

31,625

28,535

125,690

2,420

188,270

2,734

2,482

1,394

6,610

194,880

Included in the bank debt table above, are £192 million in relation to holdings in debt securities and £3 million held as deposits with credit institutions.

Liquidity risk

A significant proportion of the Group's investments are in highly liquid assets which could be converted to cash in a prompt fashion and at minimal expense. The deposits with credit institutions largely comprise short-dated certificates for which an active market exists and which the Group can easily access. The Group's exposure to equities is concentrated on shares and funds that are frequently traded on internationally recognised stock exchanges.

The main focus of the investment portfolio is on high-quality short duration debt and fixed income securities, and cash. There are no significant holdings of investments with specific repricing dates. Notwithstanding the regular interest receipts and also the Group's ability to liquidate these securities and the majority of its other financial instrument assets, for cash in a prompt and reasonable manner, the contractual maturity profile of the fair value of these securities at 31 December was as follows:

Debt and fixed income securities

Deposits with credit institutions

Cash and cash equivalents

2013 total

2012 total

£000

£000

£000

£000

£000

Less than one year

561,656

3,871

564,375

1,129,902

1,168,277

Between one and two years

515,116

1,948

-

517,064

468,475

Between two and five years

846,162

421

-

846,583

808,791

Over five years

332,822

-

-

332,822

349,761

Lloyd's deposits

80,073

-

-

80,073

70,427

Total

2,335,829

6,240

564,375

2,906,444

2,865,731

The Group's equities and shares in unit trusts and other non-dated instruments have no contractual maturity terms but could also be liquidated in an orderly manner for cash in a prompt and reasonable time frame within one year of the balance sheet date.

4. Operating segments

The Group's operating segments consist of four segments which recognise the differences between products and services, customer groupings and geographical areas. Financial information is used in this format by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The format is representative of the management structure of the segments.

The Group's four operating segments are:

London Market comprises the results of Syndicate 33, excluding the results of fine art and non US household business which is included within the results of UK and Europe. It also includes the auto physical damage and warranty businesses and aviation business from Syndicate 3624. In addition, it excludes an element of kidnap and ransom and terrorism included in UK and Europe.

UK and Europe comprises the results of Hiscox Insurance Company Limited, the results of Syndicate 33's fine art and non US household business, together with the income and expenses arising from the Group's retail agency activities in the UK and in continental Europe. In addition, it includes the European errors and omissions and specialty UK businesses from Syndicate 3624. It also includes an element of kidnap and ransom and terrorism written in Syndicate 33.

International comprises the results of Hiscox Insurance Company (Guernsey) Limited, Hiscox Insurance Company (Bermuda) Limited, Hiscox Inc., Hiscox Insurance Company Inc., and Syndicate 3624 excluding the European errors and omissions, aviation, auto physical damage and warranty and specialty UK businesses.

Corporate Centre comprises the investment return, finance costs and administrative costs associated with Group management activities. Corporate Centre also includes the majority of foreign currency items on economic hedges and intragroup borrowings. These relate to certain foreign currency items on economic hedges and intragroup borrowings, further details of which are given at note 22. Corporate Centre forms a reportable segment due to its investment activities which earn significant external coupon revenues.

All amounts reported below represent transactions with external parties only. In the normal course of trade, the Group's entities enter into various reinsurance arrangements with one another. The related results of these transactions are eliminated on consolidation and are not included within the results of the segments. This is consistent with the information used by the chief operating decision maker when evaluating the results of the Group. Performance is measured based on each reportable segment's profit before tax.

a.

Profit before tax by segment

Year ended 31 December 2013

London Market

UK and Europe

International

Corporate centre

Total

£000

£000

£000

£000

£000

Gross premiums written

668,240

559,089

472,149

-

1,699,478

Net premiums written

474,990

529,719

366,405

-

1,371,114

Net premiums earned

433,497

508,438

341,376

-

1,283,311

Investment result

8,873

18,227

12,677

20,032

59,809

Other revenues

10,063

3,191

6,498

1,153

20,905

Revenue

452,433

529,856

360,551

21,185

1,364,025

Claims and claim adjustment expenses, net of reinsurance

(178,304)

(223,196)

(117,779)

-

(519,279)

Expenses for the acquisition of insurance contracts

(105,207)

(121,525)

(79,045)

-

(305,777)

Operational expenses

(48,670)

(124,954)

(79,732)

(23,609)

(276,965)

Foreign exchange losses

(3,123)

(3,408)

(2,561)

(798)

(9,890)

Total expenses

(335,304)

(473,083)

(279,117)

(24,407)

(1,111,911)

Results of operating activities

117,129

56,773

81,434

(3,222)

252,114

Finance costs

(1,083)

-

(525)

(5,568)

(7,176)

Share of (loss)/profit of associates after tax

-

(423)

-

23

(400)

Profit before tax

116,046

56,350

80,909

(8,767)

244,538

Year ended 31 December 2012, restated*

London Market

UK and Europe

International

Corporate centre

Total

£000

£000

£000

£000

£000

Gross premiums written

640,042

507,522

418,255

-

1,565,819

Net premiums written

462,397

479,861

325,882

-

1,268,140

Net premiums earned

419,026

476,945

302,650

-

1,198,621

Investment result

26,973

17,754

29,202

18,495

92,424

Other revenues

7,115

2,136

3,992

687

13,930

Revenue

453,114

496,835

335,844

19,182

1,304,975

Claims and claim adjustment expenses, net of reinsurance

(176,253)

(222,562)

(140,011)

-

(538,826)

Expenses for the acquisition of insurance contracts

(97,853)

(112,487)

(73,275)

-

(283,615)

Operational expenses

(45,606)

(111,074)

(62,233)

(16,959)

(235,872)

Foreign exchange (losses)/gains

(10,187)

(1,647)

3,113

(11,452)

(20,173)

Total expenses

(329,899)

(447,770)

(272,406)

(28,411)

(1,078,486)

Results of operating activities

123,215

49,065

63,438

(9,229)

226,489

Finance costs

(1,319)

-

(697)

(6,589)

(8,605)

Share of loss of associates after tax

-

-

(64)

(366)

(430)

Profit before tax

121,896

49,065

62,677

(16,184)

217,454

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

The Group's wholly owned subsidiary, Hiscox Syndicates Limited, oversees the operation of Syndicate 33 at Lloyd's. The Group's percentage participation in Syndicate 33 can fluctuate from year to year and consequently presentation of the results at the 100% level removes any distortions arising there from.

b.

100% operating results by segment

Year ended 31 December 2013

London Market

UK and Europe

International

Corporate centre

Total

£000

£000

£000

£000

£000

Gross premiums written

870,936

574,034

479,151

-

1,924,121

Net premiums written

606,288

541,298

372,271

-

1,519,857

Net premiums earned

568,269

520,321

346,724

-

1,435,314

Investment result

12,035

18,276

12,734

20,032

63,077

Other revenues

-

2,703

4,547

1,153

8,403

Claims and claim adjustment expenses, net of reinsurance

(226,175)

(225,700)

(118,820)

-

(570,695)

Expenses for the acquisition of insurance contracts

(135,760)

(126,234)

(79,581)

-

(341,575)

Operational expenses

(58,947)

(126,254)

(79,792)

(23,609)

(288,602)

Foreign exchange (losses)/gains

(7,330)

(3,549)

(2,546)

(798)

(14,223)

Results of operating activities

152,092

59,563

83,266

(3,222)

291,699

Year ended 31 December 2012, restated*

London Market

UK and Europe

International

Corporate centre

Total

£000

£000

£000

£000

£000

Gross premiums written

844,330

523,405

424,189

-

1,791,924

Net premiums written

601,736

491,992

330,941

-

1,424,669

Net premiums earned

549,603

489,453

307,206

-

1,346,262

Investment result

36,842

18,283

29,590

18,495

103,210

Other revenues

-

2,097

2,453

687

5,237

Claims and claim adjustment expenses, net of reinsurance

(221,637)

(230,740)

(141,154)

-

(593,531)

Expenses for the acquisition of insurance contracts

(125,810)

(117,955)

(74,751)

-

(318,516)

Operational expenses

(54,091)

(111,810)

(61,162)

(16,543)

(243,606)

Foreign exchange (losses)/gains

(13,372)

(1,711)

3,138

(11,452)

(23,397)

Results of operating activities

171,535

47,617

65,320

(8,813)

275,659

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

100% ratio analysis

Year ended 31 December 2013

London Market

UK and Europe

International

Corporate centre

Total

Claims ratio (%)

39.8

43.4

34.3

-

39.8

Expense ratio (%)

34.3

48.5

46.0

-

42.3

Combined ratio excluding foreign exchange impact (%)

74.1

91.9

80.3

-

82.1

Foreign exchange impact (%)

1.3

0.7

0.7

-

0.9

Combined ratio (%)

75.4

92.6

81.0

-

83.0

Year ended 31 December 2012

London Market

UK and Europe

International

Corporate centre

Total

Claims ratio (%)

40.3

47.2

46.0

-

44.1

Expense ratio (%)

32.8

46.9

44.2

-

40.5

Combined ratio excluding foreign exchange impact (%)

73.1

94.1

90.2

-

84.6

Foreign exchange impact (%)

2.4

0.3

(1.0)

-

0.9

Combined ratio (%)

75.5

94.4

89.2

-

85.5

The impacts on profit before tax of a 1% change in each component of the segmental combined ratios are:

Year to 31 December 2013

Year ended 31 December 2012

London Market

UK and Europe

International

Corporate centre

London Market

UK and Europe

International

Corporate centre

£000

£000

£000

£000

£000

£000

£000

£000

At 100% level

1% change in claims or expense ratio

5,683

5,203

3,467

-

5,496

4,895

3,072

-

At Group level

1% change in claims or expense ratio

4,335

5,084

3,414

-

4,190

4,769

3,027

-

5. Net asset value per share

2013

2012

Net asset

value

(total equity)

NAV

per share

Net asset

value

(total equity)

restated*

NAV

per share

restated*

£000

p

£000

p

Net asset value

1,409,461

402.2

1,365,366

346.4

Net tangible asset value

1,336,741

381.4

1,295,749

328.7

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

The net asset value per share is based on 350,460,458 shares (2012: 394,200,249), being the adjusted number of shares in issue at 31 December. Net tangible assets comprise total equity excluding intangible assets.

6. Return on equity

2013

2012

restated*

£000

£000

Profit for the year (all attributable to owners of the Company)

237,758

208,026

Opening shareholders' equity

1,365,366

1,244,523

Adjusted for the time weighted impact of capital distributions and issuance of shares

(134,580)

(28,095)

Adjusted opening shareholders' equity

1,230,786

1,216,428

Annualised return on equity (%)

19.3

17.1

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

7. Investment result

The total investment result for the Group before taxation comprises:

2013

2012

£000

£000

Investment income including interest receivable

42,571

45,699

Net realised gains on financial investments at fair value through profit or loss

i. The weighted average return on financial investments for the year by currency, based on monthly asset values, was:

2013

2012

%

%

Sterling

3.4

3.6

US Dollar

1.5

3.2

Other

0.7

1.8

ii. Investment return:

Year ended 31 December 2013

London Market

UK and Europe

International

Corporate Centre

Total

£000

%

£000

%

£000

%

£000

%

£000

%

Debt and fixed income securities

8,326

0.9

3,192

0.7

2,748

0.3

2,839

1.3

17,105

0.7

Equities and shares in unit trusts

-

-

14,246

20.9

7,882

10.9

17,161

23.2

39,289

18.3

Deposits with credit institutions/cash and cash equivalents

330

0.7

806

0.7

1,148

0.5

246

0.2

2,530

0.5

8,656

0.9

18,244

2.8

11,778

1.0

20,246

4.7

58,924

1.9

Year ended 31 December 2012

London Market

UK and Europe

International

Corporate Centre

Total

£000

%

£000

%

£000

%

£000

%

£000

%

Debt and fixed income securities

26,813

3.5

8,585

1.9

19,191

2.5

7,990

3.9

62,579

2.8

Equities and shares in unit trusts

-

-

8,288

13.8

8,580

14.0

10,106

16.6

26,974

14.8

Deposits with credit institutions/cash and cash equivalents

242

0.2

796

0.7

1,700

0.6

399

0.4

3,137

0.5

27,055

3.1

17,669

2.8

29,471

2.7

18,495

5.1

92,690

3.1

9. Other revenues and operational expenses

2013

2012

restated*

£000

£000

Agency related income

7,100

5,866

Profit commission

9,161

5,532

Other underwriting income - insurance linked fund

1,832

1,123

Other income

2,812

1,409

Other revenues

20,905

13,930

Wages and salaries

101,780

88,294

Social security costs

20,498

15,299

Pension cost - defined contribution

6,593

6,117

Pension cost - defined benefit

1,000

1,054

Share based payments

12,523

6,135

Marketing expenses

30,550

26,251

Investment expenses

3,833

3,543

Depreciation, amortisation and impairment

9,650

7,833

Other expenses

90,538

81,346

Operational expenses

276,965

235,872

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

10. Net foreign exchange losses

The net foreign exchange gains for the year include the following amounts:

2013

2012

£000

£000

Exchange losses recognised in the consolidated income statement

(9,890)

(20,173)

Exchange losses classified as a separate component of equity

(2,030)

(35,806)

Overall impact of foreign exchange related items on net assets

(11,920)

(55,979)

The above excludes profits or losses on foreign exchange derivative contracts which are included within the investment result and are outlined in note 14.

Net unearned premiums and deferred acquisition costs are treated as non-monetary items in accordance with IFRS. As a result, a foreign exchange mismatch arises caused by these items being earned at historical rates of exchange prevailing at the original transaction date whereby resulting claims are retranslated at the end of each period. The impact of this mismatch on the income statement is shown below.

Amounts due from reinsurers in respect of outstanding premiums and claims already paid by the Group are included in loans and receivables (note 13). The Group recognised a gain during the year of £217,000 (2012: loss of £91,000) in respect of impaired balances.

12. Financial assets and liabilities

Financial assets are measured at their bid price values, with all changes from one accounting period to the next being recorded through the income statement.

2013

2012

£000

£000

Debt and fixed income securities

2,335,829

2,194,866

Equities and shares in unit trusts

223,024

190,029

Deposits with credit institutions

6,240

13,203

Total investments

2,565,093

2,398,098

Insurance linked fund

19,917

8,098

Derivative financial instruments (note 14)

44

73

Total financial assets carried at fair value

2,585,054

2,406,269

2013

2012

£000

£000

Derivative financial instruments (note 14)

229

301

Total financial liabilities

229

301

The Group has made a total investment of $30.0 million into the Third Point Reinsurance Opportunities Fund ('the Fund'), $13.2 million in 2012 and an additional $16.8 million in 2013. During the year the Fund made a gain of $2.9 million. The Fund is subject to a one year lock up from the balance sheet date. The Fund specialises in catastrophe reinsurance opportunities and is classified by the Group as an insurance linked fund.

The Group participates in a quota share arrangement with Third Point Re Cat Ltd, a wholly-owned reinsurance entity of the Fund. During the year, contracts with a premium of $3.3 million were ceded to the entity.

Investments at 31 December are denominated in the following currencies at their fair value:

2013

2012

£000

£000

Sterling

633,631

523,212

US Dollars

1,618,494

1,579,677

Euro and other currencies

312,968

295,209

Total investments

2,565,093

2,398,098

13. Loans and receivables including insurance receivables

2013

2012

£000

£000

Gross receivables arising from insurance and reinsurance contracts

422,405

425,720

Provision for impairment

(1,282)

(986)

Net receivables arising from insurance and reinsurance contracts

421,123

424,734

Due from contract holders, brokers, agents and intermediaries

302,820

295,892

Due from reinsurance operations

118,303

128,842

421,123

424,734

Prepayments and accrued income

6,754

10,345

Other loans and receivables:

Net profit commission receivable

18,905

7,295

Accrued interest

9,463

9,120

Share of Syndicate's other debtors balances

12,192

13,138

Other debtors including related party amounts

24,982

27,432

Total loans and receivables including insurance receivables

493,419

492,064

There is no significant concentration of credit risk with respect to loans and receivables, as the Group has a large number of internationally dispersed debtors. The Group has recognised a loss of £296,000 (2012: loss of £30,000) for the impairment of receivables during the year ended 31 December 2013.

14. Derivative financial instruments

The Group entered into both exchange-traded and over-the-counter derivative contracts for a number of purposes during 2013. The Group had the right and intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December 2013 all mature within one year of the balance sheet date and are detailed below.

31 December 2013

Gross contract

notional amount

Fair value of assets

Fair value of

liabilities

Net balance sheet position

Derivative financial instrument included on balance sheet

£000

£000

£000

£000

Foreign exchange forward contracts

26,793

44

229

185

Interest rate futures contracts

37,083

-

-

-

Total

63,876

44

229

185

31 December 2012

Gross contract

notional amount

Fair value of assets

Fair value of

liabilities

Net balance sheet position

Derivative financial instrument included on balance sheet

£000

£000

£000

£000

Foreign exchange forward contracts

17,755

73

301

228

Interest rate futures contracts

36,655

-

-

-

Total

54,410

73

301

228

All derivative contracts settle within three months of the year end.

Foreign exchange forward contracts

During the current and prior year the Group entered into a series of conventional over the counter forward contracts in order to secure translation gains made on Euro, US Dollar and other non-Pound Sterling denominated monetary assets. The contracts require the Group to forward sell a fixed amount of the relevant currency for Pound Sterling at pre-agreed future exchange rates. The Group made a loss on these forward contracts of £77,000 (2012: gain of £71,000) as included in note 7. The opposite exchange gain is included within financial investments.

There was no initial purchase cost associated with these instruments.

Interest rate future contracts

During the year the Group continued short selling a number of government bond futures and sovereign futures denominated in a range of currencies to informally hedge substantially all of the interest rate risk on specific long portfolios of the matching currencies denominated corporate bonds. All contracts are exchange traded and the Group made a gain on these futures contracts of £1,175,000 (2012: loss of £337,000) as included in note 7.

Equity index options

During the year the Group purchased and disposed of an equity index option to protect against a decline in equity prices. The Group made a loss of £213,000 on this contract. No such instruments were purchased in 2012.

15. Fair value measurements

In accordance with IFRS 13 : Fair value measurements, the fair value of financial instruments based on a three-level fair value hierarchy that reflects the significance of the inputs used in measuring the fair value is provided below.

As at 31 December 2013

Level 1

Level 2

Level 3

Total

Financial assets

£000

£000

£000

£000

Debt and fixed income securities

875,882

1,459,947

-

2,335,829

Equities and shares in unit trusts

-

208,960

14,064

223,024

Deposits with credit institutions

6,240

-

-

6,240

Insurance linked fund

-

-

19,917

19,917

Derivative financial instruments

-

44

-

44

Total

882,122

1,668,951

33,981

2,585,054

Financial liabilities

Derivative financial instruments

-

229

-

229

As at 31 December 2012

Level 1

Level 2

Level 3

Total

Financial assets

£000

£000

£000

£000

Debt and fixed income securities

718,393

1,476,473

-

2,194,866

Equities and shares in unit trusts

-

176,494

13,535

190,029

Deposits with credit institutions

13,203

-

-

13,203

Insurance linked fund

-

-

8,098

8,098

Derivative financial instruments

-

73

-

73

Total

731,596

1,653,040

21,633

2,406,269

Financial liabilities

Derivative financial instruments

-

301

-

301

The levels of the fair value hierarchy are defined by the standard as follows:

Level 2 - fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all

significant inputs are based on observable market data,

Level 3 - fair values measured using valuation techniques for which significant inputs are not based on market observable data.

The fair value of the Group's financial assets are based on prices provided by investment managers who obtain market data from numerous independent pricing services. The pricing services used by the investment manager obtain actual transaction prices for securities that have quoted prices in active markets. For those securities which are not actively traded, the pricing services use common market valuation pricing models. Observable inputs used in common market valuation pricing models include, but are not limited to, broker quotes, credit ratings, interest rates and yield curves, prepayment speeds, default rates and other such inputs which are available from market sources.

Investments in mutual funds comprise a portfolio of stock investments in trading entities which are invested in various quoted investments. The fair value of shares in unit trusts are based on the net asset value of the fund as reported by independent pricing sources or the fund manager.

Included within Level 1 of the hierarchy are Government bonds, Treasury bills and exchange traded equities which are measured based on quoted prices.

Level 2 of the hierarchy contains U.S Government agencies, corporate securities, asset backed securities and mortgage backed securities. The fair value of these assets is based on prices obtained from both investment managers and investment custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods, including a comparison of the prices provided by the investment managers with the investment custodians and the valuation used by external parties to derive fair value. Quoted prices for US Government agencies and corporate securities are based on a limited number of transactions for those securities and as such the Group considers these instruments to have similar characteristics of those instruments classified as Level 2. Also included within Level 2 are units held in traditional long funds and long and short special funds and over the counter derivatives.

Level 3 contains investments in a limited partnership, unquoted equity securities and an insurance linked fund which have limited observable inputs on which to measure fair value. Unquoted equities are carried at cost which is deemed to be comparable to fair value. The effect of changing one or more inputs used in the measurement of fair value of these instruments to another reasonably possible assumption would not be significant and no further analysis has been performed. The Group invested into the insurance linked fund in December 2012, which is subject to a two-year lock up period. The fund specialises in catastrophe reinsurance opportunities. The fair value of the fund is estimated to be the net asset value reported by the fund administrator at the balance sheet date. This net asset value is based on the fair value of the underlying insurance contracts in the fund which are sensitive to estimates of insurance losses that have occurred. A change in these loss estimates could have a material impact to the valuation of the fund.

In certain cases, the inputs used to measure the fair value of a financial instrument may fall into more than one level within the fair value hierarchy. In this instance, the fair value of the instrument in its entirety is classified based on the lowest level of input that is significant to the fair value measurement.

During the year, there were no transfers made between Level 1 and Level 2 of the fair value hierarchy.

The following table sets forth a reconciliation of opening and closing balances for financial instruments classified under Level 3 of the fair value hierarchy:

31 December 2013

Equities and shares
in unit trusts

Insurance linked fund

Total

£000

£000

£000

Balance at 1 January

13,535

8,098

21,633

Fair value gains or losses through profit or loss*

575

1,832

2,407

Foreign exchange losses

(91)

(762)

(853)

Purchases

522

10,749

11,271

Settlements

(477)

-

(477)

Closing balance

14,064

19,917

33,981

Unrealised gains and losses in the year on securities held at the end of the year

484

1,070

1,554

31 December 2012

Equities and shares
in unit trusts

Insurance linked fund

Total

£000

£000

£000

Balance at 1 January

10,626

-

10,626

Fair value gains or losses through profit or loss*

2,707

-

2,707

Foreign exchange losses

(120)

-

(120)

Purchases

322

8,098

8,420

Settlements

-

-

-

Closing balance

13,535

8,098

21,633

Unrealised gains and losses in the year on securities held at the end of the year

2,587

-

2,587

*Fair value gains/(losses) are included within the investment result in the income statement

16. Cash and cash equivalents

2013

2012

£000

£000

Cash at bank and in hand

389,773

428,454

Short-term deposits

174,602

229,208

564,375

657,662

The Group holds its cash deposits with a well diversified range of banks and financial institutions. Cash includes overnight deposits. Short-term deposits include debt securities with an original maturity date of less than three months and money market funds.

17. Insurance liabilities and reinsurance assets

2013

2012

£000

£000

Gross

Claims reported and claims adjustment expenses

829,548

932,604

Claims incurred but not reported

1,023,514

1,000,300

Unearned premiums

756,059

663,708

Total insurance liabilities, gross

2,609,121

2,596,612

Recoverable from reinsurers

Claims reported and claims adjustment expenses

146,946

192,311

Claims incurred but not reported

213,000

261,128

Unearned premiums

98,876

86,950

Total reinsurers' share of insurance liabilities

458,822

540,389

Net

Claims reported and claims adjustment expenses

682,602

740,293

Claims incurred but not reported

810,514

739,172

Unearned premiums

657,183

576,758

Total insurance liabilities, net

2,150,299

2,056,223

The gross claims reported, the claims adjustment expenses liabilities and the liability for claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2013 and 2012 are not material.

Claims development tables

The development of insurance liabilities provides a measure of the Group's ability to estimate the ultimate value of claims. The Group analyses actual claims development compared with previous estimates on an accident year basis. This exercise is performed to include the liabilities of Syndicate 33 at the 100% level regardless of the Group's actual level of ownership, which has increased significantly over the last nine years. Analysis at the 100% level is required in order to avoid distortions arising from reinsurance to close arrangements which subsequently increase the Group's share of ultimate claims for each accident year three years after the end of that accident year.

The top half of each table illustrates how estimates of ultimate claim costs for each accident year have changed at successive year ends. The bottom half reconciles cumulative claim costs to the amounts still recognised as liabilities. A reconciliation of the liability at the 100% level to the Group's share, as included in the balance sheet, is also shown.

Insurance claims and claims expenses reserves - gross at 100% level

Accident year

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Total

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

Estimate of ultimate claims costs as adjusted for foreign exchange*:

at end of accident year

669,683

1,115,254

579,792

777,725

1,075,246

821,808

993,242

1,272,160

1,057,677

860,336

9,222,923

one year later

741,762

1,233,202

554,120

692,889

911,663

684,966

854,945

1,163,253

956,751

-

7,793,551

two years later

707,882

1,235,091

533,799

657,347

889,343

628,608

802,475

1,113,121

-

-

6,567,666

three years later

669,729

1,217,671

504,109

670,383

852,447

622,191

788,438

-

-

-

5,324,968

four years later

672,545

1,212,057

514,148

663,326

817,827

619,368

-

-

-

-

4,499,271

five years later

655,268

1,213,309

504,085

634,675

786,340

-

-

-

-

-

3,793,677

six years later

658,520

1,170,751

491,353

619,324

-

-

-

-

-

-

2,939,948

seven years later

640,592

1,163,901

486,178

-

-

-

-

-

-

-

2,290,671

eight years later

630,910

1,164,824

-

-

-

-

-

-

-

-

1,795,734

nine years later

623,578

-

-

-

-

-

-

-

-

-

623,578

Current estimate of cumulative claims

623,578

1,164,824

486,178

619,324

786,340

619,368

788,438

1,113,121

956,751

860,336

8,018,258

Cumulative payments to date

(581,083)

(1,128,863)

(461,655)

(556,886)

(714,632)

(516,440)

(554,758)

(787,871)

(455,925)

(158,503)

(5,916,616)

Liability recognised at 100% level

42,495

35,961

24,523

62,438

71,708

102,928

233,680

325,250

500,826

701,833

2,101,642

Liability recognised in respect of prior accident years at 100% level

93,803

Total gross liability to external parties at 100% level

2,195,445

* The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2013.

Reconciliation of 100% disclosures above to Group's share - gross

Accident year

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Total

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

Current estimate of cumulative claims

623,578

1,164,824

486,178

619,324

786,340

619,368

788,438

1,113,121

956,751

860,336

8,018,258

Less:

attributable to external Names

(145,499)

(292,189)

(100,864)

(119,230)

(148,068)

(103,053)

(120,013)

(158,108)

(131,968)

(104,918)

(1,423,910)

Group's share of current ultimate claims estimate

478,079

872,635

385,314

500,094

638,272

516,315

668,425

955,013

824,783

755,418

6,594,348

Cumulative payments to date

(581,083)

(1,128,863)

(461,655)

(556,886)

(714,632)

(516,440)

(554,758)

(787,871)

(455,925)

(158,503)

(5,916,616)

Less: attributable to external Names

134,229

283,690

95,160

106,356

133,828

86,459

78,328

112,633

58,277

14,448

1,103,408

Group share of cumulative payments

(446,854)

(845,173)

(366,495)

(450,530)

(580,804)

(429,981)

(476,430)

(675,238)

(397,648)

(144,055)

(4,813,208)

Liability for 2004 to 2013 accident years
recognised on Group's balance sheet

31,225

27,462

18,819

49,564

57,468

86,334

191,995

279,775

427,135

611,363

1,781,140

Liability for accident years before 2004 recognised on Group's balance sheet

71,922

Total Group liability to external parties included in the balance sheet - gross

1,853,062

* This represents the claims element of the Group's insurance liabilities.

Insurance claims and claims expenses reserves - net at 100% level

Accident year

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Total

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

Estimate of ultimate claims costs as adjusted for foreign exchange*:

at end of accident year

559,842

660,040

517,414

680,166

757,136

683,265

802,051

996,862

781,705

753,417

7,191,898

one year later

611,085

757,346

509,141

617,800

676,350

573,442

707,446

931,322

697,198

-

6,081,130

two years later

587,133

747,643

492,373

597,711

672,768

547,761

667,677

885,364

-

-

5,198,430

three years later

551,161

723,583

450,795

568,939

634,949

549,023

652,239

-

-

-

4,130,689

four years later

552,022

713,700

467,885

564,330

603,046

544,501

-

-

-

-

3,445,484

five years later

537,492

714,416

456,356

539,510

596,807

-

-

-

-

-

2,844,581

six years later

537,690

693,885

449,501

535,782

-

-

-

-

-

-

2,216,858

seven years later

522,515

685,539

449,521

-

-

-

-

-

-

-

1,657,575

eight years later

514,753

677,940

-

-

-

-

-

-

-

-

1,192,693

nine years later

508,214

-

-

-

-

-

-

-

-

-

508,214

Current estimate of cumulative claims

508,214

677,940

449,521

535,782

596,807

544,501

652,239

885,364

697,198

753,417

6,300,983

Cumulative payments to date

(483,049)

(641,647)

(426,434)

(481,637)

(532,496)

(453,616)

(471,033)

(630,636)

(348,061)

(144,813)

(4,613,422)

Liability recognised at 100% level

25,165

36,293

23,087

54,145

64,311

90,885

181,206

254,728

349,137

608,604

1,687,561

Liability recognised in respect of prior accident years at 100% level

78,555

Total net liability to external parties at 100%

1,766,116

*The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 31 December 2013.

Reconciliation of 100% disclosures above to Group's share - net

Accident year

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Total

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

£000

Current estimate of cumulative claims

508,214

677,940

449,521

535,782

596,807

544,501

652,239

885,364

697,198

753,417

6,300,983

Less:

attributable to external Names

(119,054)

(162,485)

(93,072)

(103,305)

(105,043)

(82,481)

(87,825)

(114,578)

(79,588)

(83,221)

(1,030,652)

Group's share of current ultimate claims estimate

389,160

515,455

356,449

432,477

491,764

462,020

564,414

770,786

617,610

670,196

5,270,331

Cumulative payments to date

(483,049)

(641,647)

(426,434)

(481,637)

(532,496)

(453,616)

(471,033)

(630,636)

(348,061)

(144,813)

(4,613,422)

Less: attributable to external Names

112,426

153,620

87,338

91,517

91,581

68,299

58,794

83,872

35,549

11,729

794,725

Group share of cumulative payments

(370,623)

(488,027)

(339,096)

(390,120)

(440,915)

(385,317)

(412,239)

(546,764)

(312,512)

(133,084)

(3,818,697)

Liability for 2004 to 2013 accident years
recognised on Group's balance sheet

18,537

27,428

17,353

42,357

50,849

76,703

152,175

224,022

305,098

537,112

1,451,634

Liability for accident years before 2004 recognised on Group's balance sheet

41,482

Total Group liability to external parties included in the balance sheet - net

1,493,116

** This represents the claims element of the Group's insurance liabilities and reinsurance assets.

The insurance claims expense reported in the consolidated income statement is comprised as follows:

Year ended 31 December

2013

2012

Gross

Reinsurance

Net

Gross

Reinsurance

Net

£000

£000

£000

£000

£000

£000

Current year claims and claims adjustment expenses

(761,179)

101,561

(659,618)

(930,635)

239,912

(690,723)

Over provision in respect of prior year claims and claims adjustment expenses

188,739

(48,400)

140,339

210,843

(58,946)

151,897

Total claims and claims handling expense

(572,440)

53,161

(519,279)

(719,792)

180,966

(538,826)

18. Trade and other payables

2013

2012

£000

£000

Creditors arising out of direct insurance operations

15,364

15,606

Creditors arising out of reinsurance operations

130,814

130,605

146,178

146,211

Share of Syndicate's other creditors' balances

8,230

10,239

Social security and other taxes payable

14,764

8,649

Other creditors

12,900

9,037

35,894

27,925

Reinsurers' share of deferred acquisition costs

23,479

18,340

Accruals and deferred income

98,587

73,139

Total

304,138

265,615

19. Tax expense

The Company and its subsidiaries are subject to enacted tax laws in the jurisdictions in which they are incorporated and domiciled.

The amounts charged in the consolidated income statement comprise the following:

2013

2012

restated*

£000

£000

Current tax expense

72,425

18,724

Deferred tax credit

(65,645)

(9,296)

Total tax charged to the income statement

6,780

9,428

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

20. Earnings per share

Basic

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year, excluding ordinary shares purchased by the Group and held in treasury as own shares.

2013

2012

restated*

Profit for the year attributable to the Company's equity holders (£000)

237,758

208,026

Weighted average number of ordinary shares (thousands)

358,652

391,592

Basic earnings per share (pence per share)

66.3p

53.1p

Diluted

Diluted earnings per share is calculated adjusting for the assumed conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares, share options. For the share options, a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.

2013

2012

restated*

Profit for the year attributable to Company's equity holders (£000)

237,758

208,026

Weighted average number of ordinary shares in issue (thousands)

358,652

391,592

Adjustments for share options (thousands)

15,860

16,427

Weighted average number of ordinary shares for diluted earnings per share (thousands)

374,512

408,019

Diluted earnings per share (pence per share)

63.5p

51.0p

Diluted earnings per share has been calculated after taking account of 15,131,711 (2012: 15,915,875) options and awards under employee share option and performance plan schemes and 728,284 (2012: 510,925) options under SAYE schemes.

*The comparative information has been restated for the adoption of IAS 19 (2011). See note 2 for details.

21. Dividends paid to owners of the Company

2013

2012

£000

£000

Interim dividend for the year ended :

- 31 December 2013 of 7.0p (net) per share

24,746

-

- 31 December 2012 of 6.0p (net) per share

-

23,567

Final dividend for the year ended :

- 31 December 2011 of 11.9p (net) per share

-

46,606

24,746

70,173

The final dividend for the year ended 31 December 2012 was paid as part of the B Share Scheme. 395,188,526 B Shares of 50p each were issued, of which 12p per share was in lieu of a final dividend for a cash value of £47,423,000.

The final dividend for 2011 and interim dividends for 2012 and 2013 were either paid as cash or issued as a scrip dividend at the option of the shareholder. The final dividend for the year ended 31 December 2011 was paid in cash of £44,301,000 and 562,194 shares for the scrip dividend. The interim dividend for the year ended 31 December 2013 was paid in cash of £22,625,000 (2012: £18,206,000) and 324,261 shares for the scrip dividend (2012: 1,196,214).

Subject to shareholder approval at the forthcoming Extraordinary General Meeting on 18 March 2014, the Board proposes to pay a 14.0p per ordinary share final dividend for the year ended 31 December 2013. Together with the interim dividend of 7.0p per ordinary share, this represents a total dividend for 2013 of 21.0p per ordinary share. In addition, the Board proposes to pay a special distribution of 36p per ordinary share. Such amounts will be paid by way of a C/D share scheme. A scrip dividend alternative will not be offered to shareholders.

22. Foreign currency items on intragroup borrowings

The Group has loan arrangements denominated in US Dollars and Euros, in place between certain Group companies. In most cases, as one party to each arrangement has a functional currency other than the US Dollar or the Euro, foreign exchange gains or losses arise which are not eliminated through the income statement on consolidation. Implicit offsetting losses or gains are reflected instead on retranslation of the counterparty company's closing balance sheet through other comprehensive income and into the Group's currency translation reserve within equity.

Impact as at 31 December 2013

Consolidated income

statement

2013

Consolidated other comprehensive income

2013

Total impact on equity 2013

£000

£000

£000

Unrealised translation (losses)/gains on intragroup borrowings

(849)

849

-

Total (losses)/gains recognised

(849)

849

-

Impact as at 31 December 2012

Consolidated income

statement

2012

Consolidated other comprehensive income

2012

Total impact on equity 2012

£000

£000

£000

Unrealised translation gains/(losses) on intragroup borrowings

891

(891)

-

Total gains/(losses) recognised

891

(891)

-

Note:

The Annual Report and Accounts for 2013 will be available to shareholders no later than 17 March 2014. Copies of the Report may be obtained by writing to the Company Secretary, Hiscox Ltd, Wessex House, 45 Reid Street, Hamilton HM12, Bermuda. A copy of this and other announcements can be found at www.hiscox.com.

This information is provided by RNS

The company news service from the London Stock Exchange

END

FR USRNRSVAUURR

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